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The Most Valuable Business in the United States

The most valued company in the United States? If you guess
Coca-Cola (
KO
)
or
ExxonMobil (
XOM
)
or
Berkshire Hathaway (NYSE: BRK-A)
, you're way off. Hint: This company been around since 1851 and
does business in nearly every town in the world. Another hint: A
band called The Five Americans made it the subject of a hit song in
1967.

The biggest company in the United States by revenue, earnings
and market cap is ExxonMobil. But even Exxon's No. 1 position in
the petroleum world doesn't make it the most valued business in the
United States.

That honor belongs, believe it or not, to
Western Union Co. (
WU
)
. Though the company's market cap is only equal to about two weeks
of Exxon's revenue, its underlying financial-services business --
the one that helps people send cash around the world -- is valued
more richly than Exxon's oil exploration and production activities,
lucrative though they are.

In this case, "richly" is determined by calculating net asset
value and comparing it with market capitalization. That might sound
complicated, but it's not. Here's how it works out in three easy
steps.

1) Add up the company's assets -- anything that has value.

2) Subtract every debt. The resulting net asset value is known
as "shareholder equity." You'll find shareholder equity on every
balance sheet in the world. It's the part of the company that
belongs to the owners free and clear, just like the equity in your
house.

3) Divide market cap by shareholder equity. If the number is 1.0
or less, investors can buy the company for less than the value of
the company's net assets. Anything above 1.0 is the value of the
company's underlying business. It's the premium investors pay to
own the future of a retail store, the oil business, or the
soft-drink industry - whatever the sector.

In most cases, companies trade at a multiple of book value. That
makes sense, of course, as a company certainly should be worth far
more than merely the value of its headquarters, desks and
inventories. The S&P 500 index, in fact, trades at an aggregate
2.21 times book value. In other words, if you take the average
company in the S&P and multiply its book value by 2.21, you'll
get its market cap.

Western Union trades at 41 times the value of its net
assets.

Which brings us to an important point: There are lies, damned
lies, and statistics. The only reason Western Union trades at such
a steep premium is that it has almost no shareholder equity. Its
balance sheet shows $6.2 billion in assets but only $327 million in
equity. As things stand, Western Union's market cap is currently
about $13 billion.

The question, of course, is why Western Union's market value
hasn't fallen. If it were an "average" S&P company, after all,
it would be trading at 2.21 times its equity, or $722 million, not
even enough to merit it a spot on the benchmark index.

The answer is that investors are humans, not computers, and the
market is not an efficient or accurate processor of information.
Western Union's price didn't fall because investors really do place
a high value on its business, which it will use to boost its
balance sheet by either growing its assets or reducing its debt, or
both. When that happens, its price-to-book ratio will happily
regress to the mean.

Here is the list of the most valuable U.S. businesses. This
screen omits companies worth less than $10 billion. Except for
Amazon (Nasdaq: AMZN)
,
UPS (
UPS
)
,
Southern Copper (
PCU
)
and perhaps
IBM (
IBM
)
, these are all defensive, countercyclical companies that will have
customers in nearly any economic climate.

Are these stocks good investments? I'd be a proud owner of any
of these shares except
Lockheed Martin (
LMT
)
. All but Lockheed have seen a positive return year-to-date, and
65% of these companies have beaten the S&P so far this
year.

The biggest winners have been Amazon, +156%, and Southern
Copper, +124%. Amazon and Southern Copper trade at not only a rich
premium to book but also at a steep P/E ratio: AMZN sells for 76
times earnings, Southern Copper for 65. That strikes me as far too
rich, given tepid demand for both copper and the prospects for the
upcoming holiday shopping season, which is expected to
underwhelm.

Of the companies with a positive return for the year, the best
values, that is, the lowest earnings multiples, are
Altria (
MO
)
(11), IBM (13) and
Lorillard (
LO
)
(13).

Western Union -- whose price/book is likely to fall -- is
attractively valued at only 14.4 times earnings. Western Union's
assets may be worth a pricey 18.4 times the S&P's net asset
value, but WU's earnings can be had at a -34.5% discount to the
index.

Companies with good businesses command a high book value. When
those companies can be purchased at a fair price, it's a good
profit opportunity for long-term investors.

So with that in mind, can you guess which of the companies
mentioned in the introduction have the highest price-to-book
ratio?

Times are never too tough for a Coke. So if you said Coca-Cola,
you're right.

(Coca-Cola, 5.5, Berkshire, 1.3, Exxon, 3.3)

So have a Coke and a smile and enjoy this oldie.

Andy Obermueller

Editor, Government-Driven Investing

Disclosure: Andy Obermueller does not own shares of any security
mentioned in this article.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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